Ch 5 - Environmental Influences

Question 1

Central Banks Interests

Answer 1

Central Bank Monetary Policy BIT

Monetary, interest rate and inflation policy

Banking regulation

Implementation of government borrowing

Performance and integrity of financial markets

Intervention in currency markets

Printing and minting of notes and coins

Taxation

Question 2

Central banks are now primarily concerned with monetary policy, and control:

Answer 2

Adjustment of Banking Sector Liquidity
Quantitative Easing
Forward Guidance

Question 3

Adjustment of Banking Sector Liquidity:

Answer 3

Money market intervention is achieved through buying and selling bills to influence the level of liquidity within the banking sector and short-term interest rates (open market operations)

Central bank may also use non-market (direct) controls such as:

Setting minimum liquid reserve ratios
Setting interest rate ceilings for bank deposits
Issuing directives regarding the types of lending to be undertaken

Question 4

Quantitative Easing:

Answer 4

It usually involves both a direct increase in the money supply (electronically printing) and a knock-on effect from the fractional reserve system, increasing the money supply further.

Although it can involve just making changes to the fractional reserve system.

Question 5

Forward Guidance:

Answer 5

It enables the central bank to indicate, in the absence of any unforeseen events, how the central bank believes monetary policy will change in the future

Allows the CB to influence the long-term interest rates, inflation and the currency

Question 6

Main Investor Classes

Answer 6

Households

Financial intermediaries

Businesses

Foreign investors

Question 7

Factors that will influence the investment needs of the members of these classes

Answer 7

Time horizon

Tax position

Appetite for risk and capacity for risk

Liabilities (nature, term (time horizons), currency and certainty)

Question 8

Household considerations when making investment decisions:

Answer 8

LACED SLUT

Liabilities
Attitude to risk
Characteristics of available assets (risk return)
Expertise (their level of investment expertise)
Diversification

Stability of asset values
Liquidity
Uncertainty over future income and outgo (cashflows)
Tax

Question 9

Financial Intermediaries

Answer 9

Financial intermediaries sell their own liabilities to raise funds that are used to purchase the liabilities of other corporations

Channels resources between lenders (investors) and borrowers

Question 10

Advantages of Financial Intermediaries over direct investment:

Answer 10

Pooling of resources

Diversification

Expertise

Economies of scale (thus lower costs)

Question 11

Disadvantages of Financial Intermediaries:

Answer 11

Additional layer of costs to the investor

Products offered might not meet the exact requirements of the investor

Products may be inflexible

Lose a degree of control over investment choice

Question 12

Businesses in issuing securities to the public, have several objectives:

Answer 12

Best possible price

Market the issues at the lowest possible cost

To issue securities that best meet their requirements with regards to the term, pattern and flexibility of funding

Question 13

Businesses often seek the aid of an investment bank to help them achieve their fund raising objectives. The investment bank does the following:

Answer 13

Advise the issuing firms on the price they can charge

Handle the marketing of the security issue to the public

Checking and certifying the quality of the information offered

Innovate security design and packaging to stimulate demand

Question 14

Foreign Investors don’t like:

Answer 14

Political risks

Currency risks

Different rules and regulations for them (compared to locals)

Question 15

Main Forms of Government Policy (5):

Answer 15

Monetary Policy
Fiscal Policy
National Debt Management Policy 
Exchange Rate Policy 
Prices and Income Policy

Question 16

Other Forms of Government Policy (4):

Answer 16

Taxation
Competition Policy
Labour Policy
Government Incentives for Investment

Question 17

All government policies

Answer 17

DEM Taxation Policies on FLIC

Question 18

Government Economic Policy Objectives:

Answer 18

Unemployment

Inflation

Balance of payments

Economic growth

Question 19

Cross-border tax schemes where governments lose substantial tax revenues through companies shifting profits to locations where they are subject to a more favourable tax treatment. Examples:

Answer 19

Moving earnings to a country with a lower tax rate

Profit shifting through transfer mis-pricing

Taking advantage of differences between tax regimes

Question 20

Effects of Interest Rates on domestic economy (5 things you need to menton)

Answer 20

Personal sector (consumer) expenditure

Business sector (capital) investment and economic growth prospects

Corporate profitability

The balance of payments

Overall effect